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The relative price effects of monetary shocks

  • Nathan S. Balke
  • Mark A. Wynne

We document the response of the individual components of the Producer Price Index (PPI) to commonly used measures of monetary shocks, and show that these responses are at variance with many widely-used “macro” models of monetary non-neutrality. Monetary shocks are shown to have large relative price effects, resulting in an increase in the dispersion of the cross-section distribution of prices. Furthermore, in response to a contractionary (expansionary) monetary shock, a substantial number of prices tend to rise (fall). Most of the existing models of monetary nonneutrality are not capable of replicating these types of relative price responses.

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Paper provided by Federal Reserve Bank of Dallas in its series Working Papers with number 0306.

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Date of creation: 2003
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Handle: RePEc:fip:feddwp:03-06
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  14. Nathan S. Balke & Mark A. Wynne, 1996. "An equilibrium analysis of relative price changes and aggregate inflation," Working Papers 9609, Federal Reserve Bank of Dallas.
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  18. Nathan S. Balke & Mark A. Wynne, 2003. "The relative price effects of monetary shocks," Working Papers 0306, Federal Reserve Bank of Dallas.
  19. Lucas, Robert Jr., 1972. "Expectations and the neutrality of money," Journal of Economic Theory, Elsevier, vol. 4(2), pages 103-124, April.
  20. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1997. "Monetary policy shocks: what have we learned and to what end?," Working Paper Series, Macroeconomic Issues WP-97-18, Federal Reserve Bank of Chicago.
  21. Todd E. Clark, 1999. "The Responses Of Prices At Different Stages Of Production To Monetary Policy Shocks," The Review of Economics and Statistics, MIT Press, vol. 81(3), pages 420-433, August.
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